We expect CPO price to recover to US$610 per MT in 2019 before reaching US$611 per MT in 2020.

CPO’s affordability vs. soy oil to attract more demand.

We believe current CPO price discount against soybean oil will not sustain. The widening price discount will attract more opportunistic CPO buying action among the price sensitive buyers/traders. Since November, soybean oil-CPO price discount widened to US$140-150 per MT, above their 3-year historical average of US$100-US$110 per MT.

The difference between CPO and crude oil price is attractive at this point, as reflected in the reignition of Indonesia’s 20% bio content (B20) mandate in September. We believe that if this programme is fully and successfully implemented, it could result in up to 7-8m MT of CPO demand for biodiesel blending (compared to our base case annual biodiesel volume of 4m MT), and potentially driving CPO price to approach US$650 per MT.

We favour planters with younger tree age profiles for their higher volume growth. Volume and yield expansion can benefit margins as long as costs are well-managed, we thus believe that efficient planters can enjoy another leg of earnings expansion beyond a CPO price recovery.

We also like planters with a strong balance sheet, which would allow them to take advantage of any opportunistic brownfield acquisitions, expand value chains downstream, and/or to diversify their businesses to other crops.

Risks

Weather.

We believe the primary short-term risk for CPO prices is driven by weather. The El Nino phenomenon has a 55%65% chance of occurring in 2019, according to several media reports.

La Nina will affect rain density and hinder the pollination of male and female fruits. With the potential for lower-than-expected output, there is upside risk to our CPO price assumption.

Valuation & Stock Picks

CPO stocks with volume expansion prospect.

Amid the lack of significant catalysts for CPO prices to rally to above our base-case forecast next year, we still prefer companies with strong organic CPO volume growth prospects that can help boost profitability. Thus, we maintain Bumitama Agri (SGX:P8Z) and First Resources (SGX:EB5) as our picks in 2019 for Singapore-listed CPO companies.

Efficiency seeker: Wilmar International.

We also like Wilmar International (SGX:F34) for its capability to cope with varying commodity price dynamics in the face of an escalating US-China trade war. Improving its processing plant efficiency will also allow WIL to remain reasonably profitable in various commodity price cycles.

Growth potential, priced at a discount.

We believe the market has yet to price in the potential re-rating catalyst of higher yields which can keep their cost per hectare low and provide another earnings growth driver beyond a CPO price recovery.

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